The recent report that Principal Financial is likely buying Wells Fargo's retirement record-keeping division could be a harbinger of massive 401(k) record-keeper consolidation that puts even more assets and participants in the hands of fewer providers. What does that mean for plan advisers, and what can they do to prepare?
Though the number of 401(k) record keepers has been significantly reduced since the 2008-09 recession, there are still almost 40 national providers — most of which service small to midsize plans, and more than 500 regional record-keeping third-party administrators. No established financial services company has created a new provider in decades, but robo-record keepers such as Betterment for Business are popping up.
The cost to maintain a giant record-keeping system is growing, driven in part by cybersecurity concerns, old technology that's in constant need of repair, and the demand for new features and clean data. Broker-dealers, specialty registered investment advisers and elite advisers are asking for more support from service providers. Asset managers' funding is shrinking, with some making big bets on just a few providers, leaving less for the rest.
It's entirely possibly that in three to five years, there could be as few as five to seven major platforms that dwarf the rest of the market — plus the two big payroll providers, Paychex and ADP. Already a top retail 401(k) record keeper, Principal will become that much bigger and more formidable if it adds another 4 million Wells Fargo participants. Fidelity Investments, Empower Retirement and Vanguard Group (especially with its Ascensus partnership for small-market 401(k) plans) are already well-positioned, with Voya Financial not far behind.
It will be difficult, if not impossible, for the next tier of providers to grow organically fast enough to compete with these five, so they must either eventually acquire or sell.
So what does all this mean to plan advisers and their clients? Top-tier providers will be less likely to share participant data with advisers. Asset managers' support for advisers will be limited as larger record-keeping platforms demand more, perhaps in the form of larger fees for shelf space. And with fewer options, there could be less pressure to innovate and higher pricing, similar to the dynamic when one airline owns a particular route.
In addition, these larger record keepers might be tempted to distribute directly rather than through advisers — especially in the smaller market, if open multiple employer plans are legalized.
On the other hand, advisers who are unable or unwilling to consolidate their roster of record keepers will have it done for them, which will make service and due diligence more efficient. The more plans advisers have with a record keeper, the more power they have, resulting in higher levels of integrated service. These "super" platforms will have more capital to support new technology like blockchain and fuel artificial intelligence through big, clean data.
At a minimum, plan advisers have to start making tough calls for clients, and themselves, about which providers are likely to exit the 401(k) market or risk being left flat-footed, as was the case when The Hartford announced that it was selling its business in 2009. Though the developments may not be the advisers' fault, it will be their problem.
Plan sponsors may not be happy, especially if their adviser had recently recommended using the record keeper now selling its business. And advisers with big 401(k) books with that provider will spend way too much time fending off hungry competitors calling their clients. Tough situation. But doing nothing in the face of inevitable, and perhaps massive, retail 401(k) record-keeper consolidation will be tougher.